$8,000 a year in passive income from an $8k ASX 200 investment? Here's how I'd go about it

There's nothing like sitting back and watching that passive income roll in.

| More on:
Smiling woman upside down on a swing with yellow glasses, symbolising passive income.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Earning $8,000 of annual passive income from an $8,000 investment in an S&P/ASX 200 Index (ASX: XJO) dividend stock might sound a bit pie-in-the-sky.

And to get this out upfront, if you're hoping to achieve that kind of return immediately, well, then it most likely is.

Investing isn't a get-rich-quick scheme. Sure, there are a few ASX 200 shares that have more than doubled in value over the past year. But those super higher performers are the exceptions, not the rule.

So, to achieve my $8,000 a year in passive income from my initial $8,000 investment, I'm going to need a little patience. But that's okay. If I stick with it, I'll get there in due time.

Before we get into the details, there are a few other important things to remember.

How many baskets do I need?

'Don't put all your eggs in one basket' may be cliché. But it's also excellent advice for every passive income investor.

We'll look at one ASX 200 share I believe is trading at a long-term bargain below. But a properly diversified income portfolio should contain a larger number (10 is a decent ballpark).

Ideally, these companies will operate in various sectors and across different locations. That will reduce the odds of my income taking a big, unexpected hit if any one company or sector comes under pressure.

Also, bear in mind that the dividend yields you generally see quoted are trailing yields. Future yields may be higher or lower depending on a range of company-specific and macroeconomic factors.

Okay.

Let's dig in.

Targeting $8,000 a year in passive income

The ASX 200 share I'd invest $8,000 in today to build up to an $8,000 annual passive income stream is Woodside Energy Group Ltd (ASX: WDS).

Created with Highcharts 11.4.3Woodside Energy Group PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.com.au

As you may be aware, Woodside shares have been under pressure over the past year. That's been partly driven by lower oil and gas prices and investor discontent over the company's climate action plan. Woodside has also been spending heavily on growth projects.

But with shares down 30% over the past year, closing on Friday at $24.29, I believe that shares bought at today's prices will earn a much larger yield (more of that handy passive income) than investors buying at potentially higher future prices.

I think the oil price is near its longer-term bottom. And Woodside's growth projects will begin to deliver revenue once they come online. Woodside expects to ship its first LNG cargo from its multi-billion-dollar Scarborough project in 2026. And first oil from its Trion project in Mexico is targeted for 2028.

While I expect the Woodside share price and dividend payouts will rise significantly over the coming years, we won't factor that into our passive income calculations.

At Friday's closing price of $24.29 a share, I could buy 329 Woodside shares for $8,000, with enough change left over for a pint.

Over the past 12 months, Woodside has paid out $1.94 a share in fully franked dividends.

That sees Woodside stock trading at a (rounded) 8.0% trailing dividend yield.

This means I could expect to earn $640 a year in passive income in year one.

Now, this is where some patience comes into play, and it's why it's always a good idea to start investing early in life.

With our conservative assumptions that Woodside shares remain at current levels over the long term with no dividend increases, the power of compounding will turn that 8.0% annual yield on our $8,000 investment into $102,611 in 32 years.

I can then withdraw $8,209 a year in passive income without drawing down on that capital.

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Dividend Investing

A woman sits at her computer with her chin resting on her hand as she contemplates her next potential investment.
Bank Shares

Macquarie share price higher amid DRP dividend news

Macquarie has announced the share price of stock to be allocated through its dividend reinvestment plan.

Read more »

Couple looking very happy while shopping at a home improvement store.
Dividend Investing

Focused on pasive income? Check out this defensive ASX 200 dividend stock

A leading expert says this quality ASX 200 dividend stock remains ‘undervalued’.

Read more »

Man smiling at a laptop because of a rising share price.
Dividend Investing

2 ASX shares that I think are buys for both growth and dividends

These businesses offer so much potential.

Read more »

Worker inspecting oil and gas pipeline.
Dividend Investing

Should I buy Woodside shares today for their 8% dividend yield?

With an 8% dividend yield and a resurgent share price, should I buy Woodside shares right now?

Read more »

A woman standing in a blue shirt smiles as she uses her mobile phone.
Dividend Investing

Buy Rio Tinto, Telstra, and this ASX dividend share

Let's see what analysts are saying about these income options.

Read more »

A man wearing glasses sits back in his desk chair with his hands behind his head staring smiling at his computer screens as the ASX share prices keep rising
Dividend Investing

1 ASX dividend stock down 25% I'd buy right now

This business offers both passive income and potential growth.

Read more »

Man holding out $50 and $100 notes in his hands, symbolising ex dividend.
Dividend Investing

2 ASX shares with dividend yields above 8%

These two stocks offer investors significant passive income potential.

Read more »

Hand of a woman carrying a bag of money, representing the concept of saving money or earning dividends.
Dividend Investing

Dividend investors should put these 2 top ASX shares on their watchlist

These two businesses have exciting dividend potential.

Read more »